Across the country, there has been a debate as to whether state tobacco tax applies to federal excise tax. For example, in 2012, a Florida court in Micjo Inc v Florida DBPR, ruled that the wholesale sales price upon which tax is calculated does not include federal excise tax or shipping charges. Since 2012, we have defended assessments in which states have attempted to impose tax on federal excise tax and filed refund claims when such “tax on tax” has been paid in error.
Similar to Florida, Minnesota taxes tobacco products at the rate of 95%, which is based on the “wholesale sales price” of a “tobacco product.” Nearly identical to most states, Minnesota’s “wholesale sales price” is defined as “the price stated on the price list in effect at the time of sale for which a manufacturer or person sells a tobacco product to a distributor, exclusive of any discount promotional offer.”
The problem created by such a definition is exemplified as follows:
Total Invoice $200,000
Should the “wholesale sales price” include and operate to apply a state tax to the $100,000? $200,000?
That was exactly the issue in Micjo and a recent Minnesota case called Winner Tobacco v COR. In Winner, the wholesaler argued the tax should only be on the $100,000, not the full invoice inclusive of FET. On August 6, 2018, the Minnesota Tax Court ruled that state tobacco tax is not due on separately stated FET. Specifically, the Court held that for the invoices in which the FET was separately stated, Winner paid Minnesota tax on “more than the price for which a manufacturer sells a tobacco product.”
Like Florida and Minnesota, most states tax the “wholesale sales price” based on similar definitional language. Therefore, it is likely that you or your client may be overpaying tax and entitled to a refund. While many states do not have a tax rate as high as Minnesota’s 95%., the tax on the FET can still be substantial.
While most reputable tax professionals avoid the more obscure state taxes, like tobacco tax, our firm has the experience necessary to challenge state tobacco taxing agencies at every level from audit through protest and controversy. Wholesales tobacco tax is a unique and complex area of law requiring those in the industry to tread carefully with professional guidance during both assessment and refund denial challenges.
If you are a tobacco wholesaler located in Alaska, California, Colorado, Connecticut, Delaware, Illinois, Indiana, Iowa, Maine, Montana, New Hampshire, Oregon, North Dakota, Utah, Wisconsin, or other states with similar laws, then you may have an opportunity for a refund based on the technicality of the law discussed above.
Gerald “Jerry” Donnini II is a shareholder of the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Donnini concentrates in the area of state and Federal tax matters, with a heavy emphasis on the tobacco, alcohol, motor fuel and related industries. He also handles a myriad of multi-state state and local tax issues. Mr. Donnini is a co-author for CCH’s Expert Treatise Library: State Sales and Use Tax and writes extensively on multi-state tax issues for SalesTaxSupport.com. For more information please call us at 888-966-8216.